If
the crisis turns into a new Great Depression, it will most likely be due to a
breakdown of cooperation among the major economies. But sustaining
international cooperation requires domestic support; ignoring the demands of
poor and middle-class citizens for relief will inflame more extreme
anti-globalisation views, making international cooperation much more difficult.

If the current crisis turns into a disaster
on the order of the Great Depression, it will most likely be due to a breakdown
of cooperation among the major economies. The history of the modern world
economy - and especially of its collapse in the 1930s - makes clear that the
principal powers have to work together if they are to maintain an integrated
international economic order.

International
cooperation needs domestic support for openness

Yet governments are only able to make the
sacrifices necessary to sustain international cooperation if they can rely, in
turn, on domestic political support for an open world economy. National publics
unconvinced of the value of international integration will not back policies -
often costly and difficult policies - to maintain it. This can lead - again, as in the 1930s
- to a perverse process in which global economic failure undermines support for
economic openness, which leads governments to pursue uncooperative policies,
which further weakens the global economy.

Protectionism -
Pros and Cons

Pros:

As long as macro policies are
not coordinated internationally, externalities lessen the effect of national
stimuli. Protectionism may limit these externalities and insure that a country
gets the most ‘bang for its bucks' in the short-run (applies only in rare cases of liquidity traps)

Protectionism may ensure that infant industries may develop without being exposed to competition from superior, more developed international rivals

Cons:

Most economists agree that all countries under most circumstances would benefit from free trade

Protectionism distorts incentives in the Ricardian model of comparative advantages

Protectionist policies would
distort international trade (less bad for large, relatively self-sufficient countries (eg. the US) than
for those with extensive trade-dependent industries), harm trade regimes and
threaten international economic relations. This would especially harm the globally interconnected and trade-dependent national economies of Northern countries

Protectionism negatively affects
multinational organizations by harming their globally integrated chains of
production

On both dimensions, international and
domestic, we are in trouble. So far, despite high-sounding internationalist
rhetoric, governments have responded to the crisis with policies that take
little account of their impact on other nations. And the crisis has dramatically
reduced domestic public support for globalisation, and for national policies to
sustain it.

Why
reasonable governments do unreasonable things

On the international dimension, the threat
is not so much of explicit protectionism but rather of nationally specific
policies that impose costs on others, directly or indirectly.

These beggar-thy-neighbour
policies are not normally the result of some inexplicable bloody-mindedness on
the part of venal governments, or of purposeful antagonism toward rivals. They
are, instead, desperate attempts to defend national economies from gathering
storms. But they impose negative externalities on other countries, and in so
doing can provoke hostile reactions that can drag all parties concerned into
bitter conflict.

Not
out of arrogant nationalism but out of domestic desperation

The early-October Irish blanket
deposit guarantee, implemented with the perfectly understandable goal of avoiding
a bank panic in a small and vulnerable economy, nearly induced a run on British
banks as British depositors rushed to transfer funds from British to Irish
banks. The current American financial bailout is drawing capital from the rest
of the world - including from emerging markets that urgently need it - not out
of arrogant nationalism but out of domestic desperation. And the buy-American
provisions of the current stimulus package demonstrate the ease with which
well-intentioned policies can turn into uncooperative predation.

The range of policies of this type -
sincere national initiatives with counter-productive international implications
- is virtually endless.

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Support for troubled national firms can
turn into anti-competitive subsidies to national champions. Currency
depreciation, a common recommendation for difficult times, can put competitive
pressure on trading partners, leading to round after round of "competitive
devaluations." Debt-averse governments can limit the size of their fiscal
stimulus, thereby free riding on the deficit spending of neighbours. Countries
with intolerable foreign debt burdens can seek debt write-downs that further
cripple creditor-country financial markets. And all of these can interact to
create powerful protectionist pressures. One country's fiscal stimulus can "leak"
into a neighbour, draw in a surge of imports from the neighbour, and provoke a
bitter protectionist backlash.

Even with the best of intentions,
governments can act in ways that drive wedges among countries, block
cooperative responses to the crisis, and ultimately make everyone worse off.
And despite today's flowery rhetoric, there is little evidence that national
policymakers are willing or able to take into account the international
implications of their actions.

If this pattern continues, it will be a
major obstacle to a rapid recovery.

Will
anyone speak for the rest of the world?

Protectionist measures in national stimulus
and financial rescue plans

United States:

Even after the language of the "buy American" clause in the current stimulus package has been softened, strong fears of protectinist policies remain.

United Kingdom

A debate whether foreign workers (including
EU officials) should be kept from "undercutting" British workers still looms
large in the UK after the strikes in Lindsey ended.

France

President Sarkozy plans
to connect billions of euros in aid for the French car industry to the
condition of keeping production in France.

Germany

Chancellor Merkel (‘Madame Non') is still
hesitant to adopt large stimulus measures in light of the upcoming election in
September. As a country largely dependent on its export industry Germany has
been accused of free-riding
on its neighbors' stimulus plans.

Italy

A recently established collateralised interbank lending scheme has been seen by some commentators as an attempt of Banca d'Italia to protect national banks at the expense of non-Italian competitors.

Protectionist ideas have so far been
largely theoretic in EU member states as most "buy French" or "hire British"
clause would be illegal under community law. Still, all stimulus measures
clearly focus on getting the most out of the money spent for the national
economy, which is why direct investments in infrastructure and public-works
seem to be the primary options of choice: "A list of 1,000 stimulus projects to
start this year in France is nothing if not splendidly French. Some 45
cathedrals are to be restored and also several castles, alongside the usual
high-speed rail lines and roads. The Spanish government is so proud of a
public-works blitz of 32,000 projects that it wants to mark them with
red-and-yellow metal signs four metres wide and three metres high", the Economist
says.

Even before the crisis hit, there had been
real erosion in popular support for globalisation. Economic integration has
come to be associated with job losses, competitive pressures, and a worsening
of income distribution in developed and developing countries alike. Nearly
universally, the lower registers of the income distribution are most dubious
about the benefits of international economic integration, and these doubts are
particularly widespread in more unequal societies.

The crisis has heightened suspicion of a
world economy that appears to be the source of much of our current predicament.
There is increasing resentment that the expansion of the past ten years
primarily helped the wealthy, while the poor and middle classes are being asked
to sacrifice to deal with the hangover of the binge. This is coupled with
similar resentment that governments appear to privilege the concerns of
international banks and corporations. There is an advancing popular view that
insulation will help reinforce national attempts to deal with the crisis.

National publics will increasingly resist
making national sacrifices in order to honour international economic
obligations. Meanwhile, concentrated interests who support globalisation - such
as the international financial and corporate sectors - have been undermined by
international economic weakness. Broad popular sentiment is increasingly
widespread and powerful that national responses to the crisis must take
priority over international obligations.

Attention
must be paid: Crisis's impact on income distribution

The impact of the crisis on income
distribution cannot be ignored, for it will determine much of the politics of
government responses to the crisis. Ignoring the demands of poor and
middle-class citizens for relief will inflame more extreme anti-globalisation
views, making international cooperation that much more difficult.

These two dimensions, the international and
the domestic, are closely interrelated. The less domestic support there is for globalisation,
the harder it will be for national governments to reach cooperative agreements
with partners. The less international cooperation there is, the greater the
likelihood of a deterioration in the global economy. As in the 1930s, beggar-thy-neighbour
policies, distributional conflicts, and international economic stagnation could
feed on each other in a downward dance.

Into
the maelstrom?

Governments have to act consciously to counteract
this dismal possibility.

At the domestic level,
governments need to work out an equitable and politically sustainable
allocation of austerity across the population. This means ensuring that those
sectors of society hit hardest by the crisis are not also the ones asked to
bear the stiffest sacrifices. Societies with existing social safety nets will
have to expand them and make sure they work for wider segments of the
population than they were planned. Countries with weak or non-existent social
programs for the victims of crises such as this will have to create them, and
quickly. By the same token, basic principles of equity - and even more basic
political realities - demand that those who received the main benefits of the
boom have to bear their share of the costs of the bust. Governments that ignore
the social and distributional implications of the crisis are likely to find
themselves either driven toward extreme and counter-productive policies, or
swept away. Even sustaining existing social programs is extraordinarily
difficult in such hard times. This is true of all governments, which face
powerful fiscal pressures as tax revenues dry up and demands for spending soar.
The difficulties are especially challenging for developing countries, many of which
have lost whatever access they may have had to external sources of capital. Yet
governments that do not provide effective relief to those hardest hit by the
crisis face the prospect of dramatically increased social and political strife,
which will only deepen the disaster.

At the international level,
governments need to work just as consciously to coordinate not just words, but
actions. This will not happen of its own accord. So far, the solidarity of OECD
central bankers has been impressive. However, this builds upon a long-standing
tradition of the solidarity of central bankers, and upon decades of institutionalised
collaboration, and can only take us a very short part of the way. There is
nothing analogous on other dimensions.

The
free interplay of government policies will not spontaneously bring forth
international cooperation
Jeffrey A Frieden is Professor of Government at Harvard University.This article is based on a column in Vox. Additional material by Dennis Nottebaum
Collaboration among governments has to be
intended, designed, and monitored. This almost certainly requires some
international institutional framework, some set of agreed-upon rules and ways
of enforcing them. The governments of the major economic centres need to
consult regularly on the international dimensions of the crisis, and of its
resolution. They need to hold each other to account, and they need some
reasonably independent mechanism to identify policies that risk driving
governments toward conflict rather than mutual assistance. Other foreign policy
goals can and should be linked to supportive efforts on the economic front.

Conclusion

If governments do not pay real attention to
the domestic distributional impact of the emergency, and to the international
implications of their national policies, the current calamity will feed on
itself. The Great Depression of the 1930s was more a failure of national
policy, and of international cooperation, than it was a failure of markets.
Success in confronting the current crisis will similarly depend on socially
responsive and viable national policies, and on globally responsive and viable
international cooperation.